Understanding Asset Class Investing

Asset class investing is best explained within the framework of today’s investment management world, which can be divided into two broad categories, each reflecting a fundamentally different philosophy regarding how modern capital markets behave. These two schools of thought are generally referred to as active and passive.

Active management is the traditional way of building a stock portfolio, and includes a wide variety of strategies for identifying companies believed to offer above-average prospects. Regardless of their individual approach, all active managers selectively purchase securities, based on some forecast of future events.

In contrast, passive management makes no forecasts of the stock market or the economy, and no effort to distinguish “attractive” from “unattractive” securities. Portfolio adjustments are made only in response to changes in the underlying benchmark, or asset class.

Asset classes are groups of securities with similar risk and return characteristics, e.g., large company stocks, small company stocks, value stocks, growth stocks, US government bonds, real estate. For most asset classes there are long time series of historical data that allows us to form reliable estimates of their risk and how closely the behavior of that class correlates with the behavior of other classes.

Correlation is a measurement of the extent to which two variables move together over time. Combining assets which have a relatively low positive correlation – or are even negatively correlated – makes it possible to increase the overall return of a portfolio while at the same time reducing its risk. In contrast, assets which have a very high or perfect positive correlation (i.e., those that move in lock-step with each other) have little or no benefit as a diversification tool.

An asset allocation is the most appropriate mix of asset classes for an investor, given their risk tolerance, time horizon, goals and objectives, and other unique circumstances. Once an initial asset allocation has been established and implemented, it is maintained via periodic rebalancing, and amended as appropriate (e.g., when customer objectives or circumstances change).

We believe that passively-managed asset class funds are the most style-consistent, cost-effective and prudent method to invest in asset classes.

Investments and insurance offered through the Trust Department of First National Bank & Trust Co. are not insured by the FDIC, are not deposits or other obligations of, and are not guaranteed by, any bank or any bank affiliate. Investments are subject to risks, including possible loss of principal amount invested.